Type: Law Bulletins
Date: 04/15/2019

Failure to "Cry" Foul Leads to Contractor's Tears of Disappointment

Who cares what it says, it is just a contract right? Wrong. Many contractors feel that hard-fought negotiations with government entities on contract terms in public works projects are the most difficult battles when working in this sector. In fact, understanding and adhering to the final terms of the agreement proves to many to be the larger challenge. Unfortunately, failing this challenge could lead to severe and costly consequences for contractors who are unfamiliar with the contractual dispute requirements of their public works projects.

Yet another nod to the importance of understanding and following the terms of claims and dispute provisions within construction contracts, in Nova Contracting, Inc. v. City of Olympia, 426 P.3rd 685 (Wash. 2018), the Washington Supreme Court held that the City of Olympia was not in breach when it terminated a public works contract because of the contractor’s inability to cure submittal deficiencies identified by the City. The contractor argued that the City improperly evaluated and reviewed its submittals. The City also breached the implied covenant of good faith and fair dealing by terminating the contract after contractor neither disputed the City’s findings nor cured the deficiencies. The contract at issue contained a provision setting forth the dispute mechanism the contractor was to follow in protesting determinations by the City. Under the contract terms, after receiving the rejection, the contractor needed to provide a written notice of protest immediately to the City. The contractor failed to provide a written notice and the City terminated the contract.

The trial court ruled for the City, but the decision was reversed by the Court of Appeals and further appealed to the Washington Supreme Court. The higher court found that a breach of the covenant of good faith and fair dealing sounded in contract and not equity, and therefore the agreement controls. This ruling was a large cost to pay for not crying foul to the original rejection by the City.

Nova should sound as a cautionary tale to contractors, specifically in the area of public works. A general lack of understanding about these contracts is partially to blame. Public works contracts are unique in that state law, and not just the contract, sets the tone for the relationship between the government and the contractor. Ohio Revised Code Section 153.581(a) defines a “Public works contract” as “any contract awarded by a contracting authority for the construction, engineering, alteration, or repair of any public building, public highway, or other public work.” These contracting authorities could be “the state, any township, county, municipal corporation, school board, or other governmental entity” that may award such contracts. See ORC §153.581(b). Public works contracts are major expenditures for communities, affecting the very infrastructure of the community. As a result, there is often greater public scrutiny placed on these contracts as a whole. Is it any wonder? Huge public dollars and public safety as a whole are in play. Layering on top of these factors are public policy considerations. The stakes are high for both government contracting agencies and the contractors who provide the services for these projects.

Many fail to acknowledge that public works contracts are unique. The contract’s terms may not be the only terms governing the relationship of the parties. States, on the whole, have left little to the imagination on the procedures governing these public works contracts. For example, under Ohio Revised Code 153.16(a), (b), the State of Ohio requires “[t]he executive director of the Ohio facilities construction commission [to] establish policy and procedure guidelines for contract documents in conjunction with the administration of public works contracts…[and] any claim submitted under a public works contract…shall be resolved within one hundred twenty days.” Ohio serves as an example of how states codify rules requiring policies and procedures to address legislative disputes related to public works contracts.

So what are contractors doing? Justifiably, contractors often concentrate on the regulatory and compliance pieces affecting their responsibilities on public works projects. Contracting requirements are often highly technical and much of the contractor’s attention focuses on safety and design. The good news is that contractors are increasingly sophisticated and educated about the state codified requirements and public policy considerations impacting public works projects. Why? The public scrutiny detailed above has inevitably trickled down and impacted the contract terms for these construction projects. Governmental agencies, cities and towns draft with attention toward dispelling ambiguity about the disputes and the parties’ attendant rights and obligations. This may be through incorporation of state requirements or reference to them in the document. When dealing in so much money and so much public impact, there is good reason to address issues at the forefront. Government agencies, on the whole, favor laying out dispute and claims requirements for their own operational benefit. Another goal is to help contractors understand their obligation to address concerns implicating a public safety or design thoroughly. So the moral of the story is … when in doubt, read the contract.

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